INSIDER TRADING

Insider trading is nothing but a ‘white collar’ crime, which also results in conflict of interests. Concerns with insider trading arises as there is a likely damage to public confidence since there is clear intention to defraud the public when those with inside knowledge use that knowledge to make profit in their dealings of securities. This is nothing but unfair use of the insider information for making private gains.

Once the instances of insider trading felt, it was then that the erstwhile regulations i.e., SEBI (Prohibition of Insider Trading) Regulations, 1992 (1992 Regulations) were recommended after taking into consideration the provisions as contained in the US and UK laws. Who will be an insider and what information should be regarded as price sensitive amongst other provisions was laid down by way of the said regulations.

The 1992 Regulations had been replaced by SEBI (Prohibition of Insider Trading) Regulations, 2015 (the “Regulations”). The Regulations contained several new features, the scope of the Regulations was widened and the net of the provisions was casted too wider to get within its ambit almost every person who can be deemed to be an insider so as to curb this unfair trade practice

Regulator

SEBI regulates insider trading. Section 11 (2) (g) of SEBI Act, 1992 specifies prohibiting insider trading in securities as a function of SEBI. Further, SEBI has been empowered under Section 12A read with Section 30 of SEBI Act, 1992 to make regulations for prohibition of insider trading. By virtue of the aforesaid power, SEBI issued the Regulations repealing the 1992 Regulations

Trading Plan

Insiders who are perpetually in possession of UPSI such persons cannot be rendered incapable of trading in securities throughout the year. In such a situation, an Insider will be permitted to formulate in advance to effect trade at a subsequent date. By that time such insider would be in possession of new UPSI and the one they possessed at the time of formulating the plan would then be generally available.

A trading plan is to accommodate firm plans to acquire/ dispose off securities typically by strategic shareholders. For example, a holding company may have plan to do disposal of its subsidiary at a pre-specific time. Also, promoters of the company may have a firm plan to do a creeping acquisition of securities in their controlled company. These plans are pre announced, and are firm plans irrespective of the prevailing price. Hence, they are insensitive to prices, and hence, are presumably immune from allegations of insider trading.

Trading plan are required to be framed by such insiders who are at all times in possession of UPSI and the plan is required to be reviewed and approve and monitor implementation of the trading plan.

 

Steps which companies are required to ensure under Regulation

• Identify and designate a compliance officer to administer the Code of Conduct and another requirements under these Regulations;
• Formulate and publish on its official website, a Code of Practices and Procedures for Fair Disclosure (Code of Fair Disclosure) of UPSI that the Board will follow to ensure uniform dissemination of UPSI;
• Having a policy for determination of legitimate purpose, which should be an approach driven policy and shall be a part of the Code of Fair Disclosure.
• Formulate a Code of Conduct to regulate, monitor and report trading by the Designated Persons and their immediate relatives as prescribed in Schedule B and or Schedule C, as the case may be.
• Maintaining a Structural Digital Database of persons with whom UPSI is shared;
• Putting in place adequate and effective system of internal controls to ensure compliance of the provisions of the Regulations in order to avoid insider trading:
• Review of the system of internal control by the Audit Committee atleast once a year, verifying whether the systems for internal control are adequate and are operating effectively
• Policy / mechanism to prevent any leak of UPSI and to set up the procedure for inquiry in case of leak of UPSI or suspected leak of UPSI.
• Ensuring compliance with initial and continuous disclosure requirements from the promoters, KMPs, directors, designated persons respectively and intimate the same to the stock exchange(s);

Disclosures Obligation

 Initial Disclosures (one time Disclosure)

Continual Disclosure (Event based Disclosure)

Discretion based Disclosure (Disclosers by other connected Person)

 

Regulations	Disclosures Requirement	Particulars	Time period	Format
Reg 7(1)(b) {One Time Disclosure}	Upon appointment as :- v  Promoter v  Members of the promoter Group v  KMP v  Director	Holding of Securities of the company as on the date of appointment or becoming a promoter	Within 7 days of appointment or becoming a promoter	Form B
Reg 7(2)(a) {Continual Disclosure}	v  Promoter v  Member of the promoter group v  Designated person v  Director	Number of securities acquired or disposed off in case the transaction or a series of transactions over any calendar quarter traded value exceed 10 lakh Rupees.	Within two trading days of such transaction	Form -C
Reg 7(2)(b) {Continual Disclosure}	Company required to notify to stock Exchange	In case the securities traded by promoter, members of promoters group, designated person or directors during the calendar quarter , traded value is in excess of 10 lakh Rupees	Within 2 trading days of receipts of such disclosure of becoming aware of such transaction.
Reg 4(1) proviso of clause “i” {Continual Disclosure}	Insiders	The transaction in off market inter se transfer between insiders who were in possession of material information without breach of regulation 3	Within 2 working days of such transaction	Not Specified
Reg 4(1) Second proviso of clause “i” {Continual Disclosure}	Company required to notify the stock exchange	Particulars of such trades to the stock exchange	Within 2 days of receipt of disclosure becoming aware of such information	Not specified
Reg 7(3) {Discretion based Disclosure}	v  Other connected Person v  Class of connected person	Holding /trading in securities	As determined by company	Form D

 

This Article has been Compiled by Swati Garg (Senior Associate)

You can direct your queries or comments to the author at swati@factumlegal.com

 

Disclaimer-

The contents of this article should not be construed as a legal opinion. This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. We expressly disclaim any financial or other responsibility arising due to any action taken by any person on the basis of this article.